For parents helping to foot their child’s college costs, parent PLUS loans have become a popular option. From 2005 to 2015, borrowing for parent PLUS loans increased by 20%, topping out at $12 billion. And in 2012, the latest year for which data are available, the average borrower had accumulated $28,400 in parent PLUS loans by their child’s senior year.
These loans allow parents to shoulder some of the financial burden of a college education, but they also mean an added expense ahead of retirement — and that’s a problem, because many people aren’t saving enough for retirement to begin with. A 2015 Government Accountability Office report states that almost a third of households 55 and older had no retirement savings or benefit plan. That’s unnerving when you’re staring down that finish line.
If you have a parent PLUS loan, here’s how you can reduce your student loan debt and use the savings to pad your retirement fund.
Step 1: Refinance your parent PLUS loan
Parent PLUS loans typically carry the highest interest rates of all federal loan types. During the 2016-17 school year, for example, direct parent PLUS loans had a 6.31% interest rate, compared with direct subsidized loans, available to undergraduates, which had a rate of 3.76%.
The good news is that you may be able to lower your interest rate through student loan refinancing. Much like refinancing a mortgage or auto loan, your new lender will pay off your old loan and issue you a new one with new terms. Most lenders look for a credit score of 650 or higher, a low debt-to-income ratio and a steady income. Parents are generally good candidates for refinancing.
The savings might look something like this: If you took that $28,400 loan and the 7.9% rate it carried in 2012, and refinanced down to a 4% interest rate on a 10-year loan term, you’d save $6,663.60 over the life of the loan.
You’ll save the most by opting for the lowest interest rate and shortest loan term offered. Keep in mind, though, that refinancing a federal parent PLUS loan means giving up federal borrower protections, such as income-driven repayment and loan forgiveness, so you should be confident you won’t need those before applying.
Step 2: Grow the savings in your retirement fund
That $6,663.60 of savings from refinancing translates to about $56 per month. It may not seem like much, but investing that money in your 401(k) or individual retirement account can make a sizable difference. Thanks to compounding, which makes your investments grow faster over time, a 50-year-old borrower who saved an additional $56 a month would accumulate nearly $22,000 over 17 years. That would get you one step closer to your dream retirement.
Use NerdWallet’s retirement calculator to see if you’re on track.
To bolster your savings further, max out your 401(k) match, if available.
For some borrowers, refinancing can let you off the hook for the loan completely. A handful of lenders, including CommonBond and Darien Rowayton Bank, let students refinance parent PLUS loans in their own names. So you’d no longer be responsible for repaying the loan, your kid could get a better deal than when you started making payments, and you’d be that much closer to your dream retirement. Just make sure that your grad qualifies for refinancing and understands the potential risks involved.